Financial professionals, and the rich and famous fail to diversify too!

In previous posts I have discussed the problems that ordinary employees have with investing their retirement plan assets. In short, they fail to diversify. They mostly put too much money in the stock of their employer. In 2008 we saw two spectacular events (Bear Stearns and Madoff) that illustrated that even the financially savvy, rich and famous fail to diversify too.

In the spring, we learned that the employees of the failed investment bank Bear Stearns where heavily invested in the firm's stock. The 14,000 employees lost a total of about $5 billion (an average of $350,000 each). These are financial professionals at one of the worlds more prestigious financial institutions. They should know better than to have so much money tied up in one stock.

In the Madoff $50 billion Ponzi scheme case, many professionals and rich people lost most, if not all their wealth. Many charitable foundations that managed tens of millions (even billions) of dollars lost so much they had to close operations. For example, the Picowar Foundation lost $1 billion and closed its doors. The Frank Lautenberg Foundation lost $12.8 million of its $13.8 million in assets. The Carl and Ruth Shapiro Family Foundation had 45% of its $345 million portfolio with Madoff.

For example, Stanley and Sarah Chais lost all their investment assets, $1.2 million. Also consider Eric Roth, 65, who is the award-winning screenwriter of "The Curious Case of Benjamin Button" and "Forrest Gump." He learned that his retirement nest egg (ultimately invested with Madoff through another financial manager) was gone on the same day he was nominated for a Golden Globe award for "Button."

And of course, the investment professional Rene-Thierry who ran his own fund, but invested all of it with Madoff. After losing his fund's $1.4 billion and most of his own wealth and that of his family (tens of millions of dollars), he committed suicide.

These are examples of rich people, famous people, large foundations, and financial professionals all failing to diversify. They should know better!

Of course it was dumb to put all or even half of your fortune into a single (somewhat mysterious) investment. Any investment advisor worth his salt would say that hedge funds in general are inherently risky and should make up only a small portion of your portfolio- and further that your total investment in hedge funds itself should be divided among several funds.

And any investment advisor that said it was a good idea to invest most or all of your money in a single fund (like Madoff's) deserves almost as much derision and blame as Madoff himself. That's an absolute silly, no-no that anyone with common sense should know- certainly anyone who sells their financial advice for a living.

And anyone that thought diversification was passe, should have gotten a sufficiently good reminder in 2001 when the tech bubble crashed. Many people with similarly undiversified portfolios (invested in mysterious tech stocks) who had been making above market returns, saw the rug get pulled out and lost a bundle.

But I don't blame rich people and famous people quite as much. If they had lots of extra money to burn and didn't have the time/patience to invest it smartly, then maybe that made sense for them. After all, many rich people commit even worse acts in terms of wealth creation- they just spend it or gamble it in Las Vegas!

The worst offenders were the foundations and other charitable organizations. I believe that when someone donates their money for you to do good with it, that you have a sacred obligation to make sure that the donation achieves its appropriate charitable purpose. By not diversifying, investors of charitable money broke that solemn agreement- and they deserve full blame and truly should be removed from their positions as this was gross negligence on their parts.

The media seems to paint this situation as if Madoff is the only culprit, but he would not have been allowed to build up his fund to anywhere near $50 billion had not so many greedy, dumb and/or unscrupulous people violated the basics of investing: 1) Diversify, and 2) Don't invest in something you don't understand- worse than just making a mistake, they are all his accomplices.

I agree that it is not smart to invest in only one company, however, I also realize that people have a tendancy to have more faith in the company that they are working for. It's still not the most intelligent thing to invest half of your fortune in one place. They should really hear the quote "Never put all your eggs in one basket".

True, but many people see that investment into their own company motivates employees to work harder. I know it is a bad decision but it is hard to bash someone too hard on their faith in "family" and hard work. Up until now, many of these practices did pay off.

I found this strange because I think that not puting everything in one place would be logical for most people, even those who no little about finance. However I would attribute some of these peoples failures to being to cocky. I think that some of them may have been very dedicated to their choices and had a large belief that they were right, this would cause them to make the mistakes they did. I think this article would have been better if it would have disscussed some reasons why this might have happend.

It is amazing that professionals in finance can still make the huge mistake of investing all of their money in one place. We have always been told not to put all of our eggs in one basket, and even the most financially savvy people have made this mistake.

It sucks to see these people losing so much money in their companies. When you think about it, it makes since not to invest your money in your own company. Its probably hard not to though, especially when your company is so successful and your company is the reason why you have the money. Why not invest it back into the company that you gained so much success from. But someone with so much money should think a little harder about where to put his/her money and you would think they would know it's smart to spread it around.

I had no idea that so many people lost so much. Particularly the charities. I sympathize with those who received from the charities but at least people who were donating them know to pick more financially savvy charities. The really scary thing is that in a few years people will probably make the same mistakes, especially those that don't follow the media much.

Hi Everyone,
It is a kind of scary thing hearing or knowing that a lot of people are losing financial capability. It is a warning message especially for investors these days. I believe that immediate actions should be taken so that financial institutions can be recovered.

I have been guilty of putting all my eggs in one basket. I'm sometimes omstimistic and hope I receive a big return on a risky investment but know its a dumb decision. I would never invest my life savings in one investment.

I thought these professionals would know that never put all of the investment in the same place, such a mistake has made people lose all of their money. It's sad to hear about the Eric Roth case, like Eric there are many people have lost their retirement money over this recession. Hopefully the economy will be better by the end of 2009.

Its amazing how much faith investors can have in one person or one company to invest almost all their assets with them! It seems like common sense to not diversify your investments, i bet almost any college student could tell you that! It just shows that even if you trust these companies and people with your money you should never give them all your assets! Diversify!

Of course it isn't always a good idea to place all of your eggs in one basket, but in certain scenarios it is the only way. Consider any entrepreneur. The risk involved possibly surpasses that of those who lost only their nest egg, yet many would never be able to embark on their own endeavors had they not taken such great risks. I am certainly not arguing for simplistic or foolish investing, but in the end, someone does eventually benefit from the use of funds. I guess whether or not it was the investor and if the investor ever really had control is the crux of the matter.

It's unfortunate that such professional investors and wealthy individuals create such a huge mistake in the financial world. They are the ones that should be giving advice to future investors and know that putting all your money into one stock is extremely risky. As good as the return on the investment could be, it obviously has drastic set backs. As greedy as one might be, its a no brainer to diversify your portfolio.

This article is a bit shocking becasue you would think that people in one of the world's prestigious financial institution would understand the importance of diversifying your portfolio to reduce aggregate risks with the stock market. The article explains that most of these people lost thier money becasue they had figures like 45% of thier stock worth tied up to thier business/ employer. I thought this was interesting because even if they are educated investors, they still did what may have seemed right and comfortable at the time by investing in thier companies.

I do agree that one should not put all their eggs in one basket. But a couple of years ago before they horrific economic down turn the economy was flurishing. companies were doing great and almost anyone could get a loan. But this soon started to fail. Because the market was so good that people were starting to invest in the new company that seemed like it would never fall and in many instance people even opened up new branches banking on the rise in the economy to maintain. when the economy did the opposite people suffered. because people wanted to make so much and invest more and more they did not see what was happening. IF IT SEEMS TOO GOOD TO BE TRUE THEN IT PROBABLY IS.

Though it's not the brightest thing to do, many people do have all their investments in one place, and a lot of times that place is in the company they work for. I think a big reason for that is people live with the mindset that it can never happen to them. Or the company they work for could never fail or go under. They live with the mindset that their money is entirely safe, but in reality, there are so many signs before they lost all that money that was telling them that wasn't so.

Its weird that while there is a wealth of financial information all around us some of the most knowledgeable people turn a blind eye to the fact that they could be affected by a market downturn. I don't know if it is too much confidence in their investments, lack of planning or thinking it could never happen to them. Interesting stuff.

Yes it is important to diversify. Where I think these people went wrong is with the notion that, such a prestigous company such as Madoff will never fail so why diversify when I could make so much more money putting all my eggs in one basket. This is a prime example though that nothing is for certain, and anything can happen.

It is not surprising that people who are supposed to be experts with their money could invest so much in one place. When they are working for a company that they believe is strong, they feel as if they know the company so well that they see no possible way of it ever failing. Sometimes personal feeling and emotions can get in the way of making practical decisions.

These people were stupid. I thought everyone has heard the saying don't put all your eggs in one basket. Even the best looking companies can fail. Enron looked really good and a lot of people probably had there money all in there and look what happened. If people saw what happened there and didn't change what they were doing they deserve to lose all their money.

Ah yes, diversification. Probably one the first lessons all of us as investors will learn and most of us will follow it faithfully... and get national average returns.

First, I agree with diversification as a strategy. As the Modern Portfolio Theory states that investors can reduce risk by holding assets that are not perfectly correlated. And it says that for a reason.

But we have also have to look at the degree of diversification. If you look at Warren Buffet's portfolio, his top investments (by % share) are American companies. And he does not diversify among industries as well. They are all consumer franchise (e.g. Coca-Cola) and corporate franchise (e.g. American Express).

For those of us want to earn above national average returns,

1) Manage your own portfolio. Turns out 75% of the manager under performs the market. This is because Modern Portfolio Theory recommends buying and holding long term.

2) Know the company you are investing in. This means careful stock selection, and be able to determine value of the stock.

People have to much faith in their own employer. They have the idea that since they work for them they know how the company is and it will all be fine but than when the stocks take a dump they don't understand why they can't retire to that beach home that they were planning on.

I agree that many rich, professional, and famous people have lost a lot of their assets by investing in stocks. This article demonstrates the way these people made mistakes. In large companies, it is common to award the employees with the companies' stocks. I have always thought it was good way to award employees since they work for the companies and therefore they must trust their comapnies. Also, having the company stock would increase employees' motivation to work harder to make profit.
This was probablly why they lost so much of their assets. I think the best way to minimize personal loss is to not trust anything at this moment.

I would expect that the rich and famous fail to diversify, but it comes as a shock to see that financial professionals do as well. One would imagine these people would be the most likely to be smart in investing. Apparently this isn't always the case

Its very interesting to see that everyone can be hurt by the economy. These are just lessons for us not to invest in one stock but to diversify so that if this ever happens again which it probably will you are able to still have funds in other investments.

I will carefully plan where i will invest when i retire. Since the decision will affect the rest of my life after retire, therefore i won't invest just because which company i work for. It will help me to save lots of money if i carefully plan for it.

This article makes creates further support that being rich and famous does NOT equal being smart or well researched. Even people who are considered financial gurus can be caught looking blindly past subtle signals when they're wallet is getting fatter for it. This seems to be one of the biggest challenges to investing with success.

The Madoff $50 billion Ponzi scheme case is definitely a big shock for many people recently. Many people, including financial professionals lost nearly all of their wealth in this case. A lot of people chose to believe Bernard Madoff and put nearly all of their wealth for him to invest. They believed in him because of his good reputation in stock market. Yet the truth is, they are cheated by him and lost their money.
People who are cheated include many financial professionals, but they fail to diversify as they are too confident on Madoff and themselves. They should know that it is risky to concentrate in a portfolio, but they still decided to put a lot of money in it. It brings me a question: should those investors blame on Madoff or actually themselves? I think people should think about this seriously.

Yes you should diversify your stocks. But I have heard in the case of retirement funds to diversity your funds in high risk, high return situations in the beginning then when coming closer to the age of retirement shift your funds to low risk. This is because when you're younger you can afford the loss, because you have time to make up for it. While when you're older, the funds are more important and time sensitive. Many of these people give their retirement funds to someone else to manage. While these people are trained in finances, they are by no means psychic.

i agree with a lot of you. i think people know better but they ignore common sense because they feel loyal to their company and want to support it by investing in it whole-heatedly. i also think its driven mainly by fear. fear of the unknown. they know (or think they know) their company and are to afraid to invest in something they aren't educated about (more reason to read up before you invest!!!) or make there own decisions and stray from the social norm of there colleges and friends.

Its definitely not a safe bet to put all your eggs in one basket and in this case it can prove to hurt people substantially. Spreading out investments is the safe bet in the financial world. In unpredictable times like this its never safe to rely solely on one investment.

It's such a shame that so many people lost money. I don't think it's fair, however, to say they should've known better. There probably wasn't much they could've done, and I believe the businesses should have done better. In their defense they invested in reputable businesses that closed due to extraneous situations.

After reading your blog I am definitely thankful that I am just a poor college student! On a serious note though, I can't imagine what it would be like to suffer that bad financially.. and to think that the situations you wrote about could have been avoided if those people would diversify their investments!

I'm not at the point in my life where I am investing alot of money or putting anything away for my retirement but after this post I will probably think about it a bit more. These people losing so much without knowing it would be terrible. I can't imagine losing all the money I had packed away for years of retirement laying on the beach somewhere down in Mexico pounding cervezas to the face. Complete and total sadness.

As it has probably already been mentioned in this discussion, diversification cannot be underestimated. It is extremely important. A couple of months ago, I was helping my father with his investment portfolio and I found that he had over 50% in the company he worked for. I helped him divert some of those funds into other investment options available. Mutual funds are a simple way to diversify a great deal. There are even funds of funds that diversify to a greater extent. I have one of these so I don't have to worry about diversification at all.

The problem stems from the fact that many people who want to invest don't know who to invest in and how to figure that out. They invest in their employer because that is all they really know. Investing in one strong company can work out really well sometimes, but one can never know what unexpected things might occur, and having all your eggs in one basket is far too risky. People need to be more educated on how to select safe companies to invest it.

Of course it is not smart to invest all your money into one stock. You never know if that company is going to fail and be out of business the next day. Even the biggest businesses can fail, like in the case of Enron. Many people lost a lot money because they didnt know what was going on on the inside and Enron was shut down out of nowhere once the scandal came to the surface. I do however think it is a smart idea to invest in your own company. It is important to know about the stock and company you are investing in, but be wise how much you invest. Just think if the company were to be no longer in business, would you still have enough money to support yourself? It was not smart of the professional who invested not only all of his own money, but the money of his family too.

How unfortunate! I think this goes to show that, like our teachers have always told us, many many investors are emotional and irrational investors. This is pretty discouraging to think that many invest so poorly without basic finance and economic knowledge clearly telling them something else. Diversification is the way to go!